(1) Field of the Invention
The present invention relates generally to the field of wholesale brokerage services, and more particularly to the automated or semi-automated provision of a call for quote/price system and associated methods in a wholesale financial market.
(2) Description of the Related Art
The “request for quote/price” (RFQ) method has commonly been used in the financial market to determine the price at which a party might be interested in buying or selling a particular quantity of a financial instrument. In the wholesale (dealer-to-dealer) fixed income securities environment, the RFQ is used to electronically request a quote (bid or offer for a specified amount) from one or more banks. Once an acceptable quote is received, an electronic trading system is typically used to execute a corresponding transaction. Several successful services exist in the market place that use one-to-one and one-to-many RFQ services.
TradeWeb Group LLC offers an anonymous client-to-dealer system that enables institutional investors to simultaneously receive live price quotes for U.S. fixed income securities from a group of designated dealers and to trade those securities instantly. Currenex/FX ALL also provides an anonymous end user price quote system to market makers in the foreign exchange space. Reuters, on the other hand, has long provided an open (not anonymous) dealer-to-dealer service that provides for conversational trading between dealers. See for example, U.S. Pat. No. 5,195,031.
The problem with non-anonymous systems is that they fail to adequately protect the most important information among competitive dealers: dealer specific price information. Price information is always very valuable, even in highly liquid markets, but is critical in less liquid markets, or where no market exists at all. Likewise, in anonymous systems, dealers can use the RFQ for price discovery purposes only, not to trade, and because the dealers cannot be identified by name there is no direct repercussion from using the system in this manner. There is an indirect consequence, however, which is that other dealers may (or more likely, will) not respond to such requests in order to protect their own price information. Another way to look at this situation is that the dealer requesting a price on a specified amount of a security receives value, in the form of knowing where (what price) a dealer would trade, and gives nothing in return, unless a trade occurs. As a result, attempts to implement an anonymous dealer-to-dealer RFQ system have not been successful due to dealer misuse and distrust.
In contrast, if a dealer (Dealer A) sends an RFQ request to a group of banks on the open Reuters system, Dealer A's name is attached to the request. When another dealer (Dealer B) responds to Dealer A, Dealer B's name is attached to the responsive price. As both dealers are identified, the market can police itself because if Dealer A continually requests a price, but does not trade, the other dealers can stop trading with him. Ideally, Dealer A would prefer to be able to request a price from other dealers without having to disclose his name until after the trade has been agreed because this would allow Dealer A to shop for the best price, but as noted above, this leads to RFQ price fishing and ultimate dealer rejection of the trading system.
As also noted above, a related issue exists when a dealer wishes to start a market when no prices currently exist. Illiquid markets are difficult to start because a dealer does not want to offer a price without any knowledge of what the market will bear, but until the dealer offers a price and a spread is created by another dealer, there is no market. In some non-electronic markets operated in developing countries, dealers wishing to trade with each other in the absence of a current price will initially make verbal markets with each other. It would be ideal to create an electronic market that offers the same market initiation feature while preventing dealer misuse and promoting dealer trust.